ASX is set for a flat start to the week

Australian shares are poised to open the week little changed. ASX futures were down 2 points. The local currency edged higher.

It could be a quieter than usual week as markets are closed on Monday for holidays in the UK and the US.

Xi last week made clear China wasn't able to throw in the towel. AFP Pool

Still, if last week provides a precedent, investors will remain wary of any further heightened trade rhetoric between the US and China.

"Effectively, investors are still in the process of readjusting expectations on the trade war, shifting its probabilities from outside risk to base case in a matter of weeks," Bank of Montreal chief economist Doug Porter said.

"And, given the tone from both sides—including Xi [Jinping] harkening back to The Long March—this seems to be a prudent step."

Advertisement

Local investors await first-quarter capital expenditure data on Thursday, which will help with refining March quarter GDP forecasts; the GDP report is due June 5.

NAB expects overall capex lifted 1 per cent in Q1 (mkt: 0.5 per cent), with a 1.3 per cent lift in equipment investment, which is the component that feeds into GDP.

"The survey also includes updates of firms’ investment plans for 2018‑19 and 2019-20, which might be weaker than we anticipated given the earlier turn in the NAB business survey," NAB economist Kaixin Owyong said.

Elsewhere, building approvals and credit data should highlight the ongoing slowdown in the housing market, Ms Owyong said. NAB forecasts approvals fell 5 per cent in April (mkt: flat) with monthly credit growth slowing to 0.2 per cent (mkt: 0.3 per cent).

Today's agenda

No local data

Overseas data: China industrial profits April; Holidays in the UK and the US

"The S&P 500 Index is currently trading at roughly 17 times next year’s earnings (as measured by price-to-earnings ratio, or P/E) and a little under 19 times trailing earnings. Today’s valuation is high but not extreme. The P/E on the S&P 500 is slightly above the post-crisis average and modestly above the long-term average. That said, today’s valuation is roughly 20% below the January 2018 peak and roughly 35% below the 1999 top."

Apple is unlikely to feel the brunt of tariffs because the company is a key player in China's tech ecosystem and CEO Tim Cook has the ability to navigate such issues with President Donald Trump and lobbyists, Wedbush writes.

Advertisement

'We believe calls of EPS getting hit by 20 per cent/30 per cent+ with China being closed off as a region for Cupertino remains 'doomsday calls' that are simply not realistic in our opinion,' analyst Daniel Ives writes.

Europe

UK markets will be closed on Monday for a bank holiday.

European shares rose on Friday after Trump predicted a swift end to a damaging trade war with China.

The market appeared unfazed by British Prime Minister Theresa May's resignation as Conservative party leader.

The pan-European STOXX 600 ended up 0.6 per cent but posted a weekly loss and remained on track for its first monthly decline since a steep sell-off at the end of last year.

Britain's FTSE 100 held its gains on May's announcement as investors had already priced in May's move when rumours first started circulating.

The FTSE 100 added 0.7 per cent and the midcap index rose 0.5 per cent, slightly off its opening levels.

Advertisement

Among midcaps, Royal Mail jumped 6.4 per cent on its best day in 5-1/2 years after two brokerage firms upgraded the stock following results earlier this week in which the company detailed its turnaround plan.

Asia

Capital Economics' outlook for China: "...the worst may soon be over for China’s economy in the near term, with growth likely to stabilise soon. But that doesn’t mean that everything is fine.

"Even without a further escalation in the trade war with the US, the recovery from China’s recent economic downturn was likely to be the weakest in a very long time. With the latest escalation, the chances of a sizeable rebound in growth have been further reduced.

And the longerterm outlook has not improved. China’s trend growth rate has halved over the past decade and is likely to halve again over the 10 years to come."

Captial Economics said it estimates that the Chinese economy currently is expanding at a 5 per cent pace.

"GDP growth has halved over the past decade," Capital Economics also said. "It is likely to halve again, taking it down to about 2 per cent trend growth, over the ten years to come. That’s not terrible by global standards.

"Two per cent growth is about average for a middle-income economy and a little better than the average country might be expected to achieve if it had China’s demographics. But it is a long way from the 5 per cent most long-run forecasters appear to be expecting.

Advertisement

"A final thought, as the US and China square up over trade: a slowdown to 2 per cent probably would not be enough for China to significantly overtake the US in economic size."

Hong Kong stocks ended higher on Friday, but lost ground for a third week in a row.

The Hang Seng index rose 0.3 per cent, to 27,353.93, while the China Enterprises Index gained 0.4 per cent, to 10,445.54.

For the week, HSI sank 2.1 per cent, while HSCE lost 2.3 per cent, both declining for the third week in a row.

Leading losses in the market, the Hang Seng information technology index has lost 14.6 per cent so far in May as the tech cold war fears simmers. The index is set for its worst monthly drop since October 2018.

Tech giant Tencent Holdings slumped 8.5 per cent for the week, losing 16.1 per cent in May so far.

Electronic parts maker Murata Manufacturing crawled back 1 per cent after its fall to a 2-1/2-year low earlier in the day prompted some bargain-hunting. Still, it is down almost 25 per cent so far this month.

Currencies

TD Securities not betting on a US rate cut just yet: "While we expect the Fed to ease should the trade war intensify, we don't expect the Fed to be preemptive in doing so.

"Rather, Fed officials are likely to wait until there are clear signs of economic weakness before reacting. This approach risks being too little, too late to prevent a deeper contraction in activity if markets were to react sharply and confidence were to stumble. As a result, an outright easing cycle appears more likely than a few 'insurance' cuts, in our view."

Oxford Economics says sentiment towards the US bond market has turned south: "The 10-year Treasury yield touched its lowest level since late-2017, down about 40 basis points below its 2019 high. Meanwhile, the yield curve continued to flirt with an inversion as the spread between the 3-month and 10-year Treasury yield hovered around zero [last] week.

"At the same time, the 10-year break-even rate – a key measure of markets’ inflation expectations – dropped to 1.77% this week, from 1.90% just two weeks ago, confirming our findings that trade wars are disinflationary in the medium run."

Advertisement

Commodities

RBC Capital Markets' take on iron ore prices: "Trying to peg the top in this market, which is heavily influenced by the ~$25bn a day of financial flows is going to be more of a guess than science, but we expect the break-neck speed of Chinese steel production to slow, especially now that margins are once again falling.

"We expect prices to turn in Q3 and start to edge back towards $70/t by year end, providing a 2019 average of $82/t. We expect prices to average $65/t in 2020 with better conditions in the first half of the year. We then forecast 2021and 2022 at the 90th percentile of the cost curve or c. $60/t."

RBC's view of China's steel output, which has been higher than expected so far this year: "In our view, it would be near-heroic for the Chinese economy to continue to consume as much steel as it is currently in the long-term. We also think that the divergence between steel demand and what has been more modest demand for other metals (where prices are nearing 52-week lows) also suggests normalisation."

Bank of America Merrill Lynch's iron ore producers' bets: "Although we now see iron ore strength spilling into 2020E, we consider current prices near peak. We upgrade Vale to Buy as restarting iron ore production acts as a hedge to lower prices, and we see catalysts from resuming its dividend later in 2019E plus potentially divesting underperforming assets. Our preferred iron ore exposure in Australia remains Fortescue (Buy, PO A$8.60/shr). For global peers, we remain Neutral BHP and Underperform RIO, as profits retreat from "supranormal" iron ore prices with no offset. Pellets should remain constrained and we stay at Buy on Ferrexpo (FXPO)."

US energy firms this week reduced the number of oil rigs operating for a third week in a row as weaker oil prices encourage drillers to follow through on plans to cut spending.

Advertisement

Drillers cut five oil rigs in the week to May 24, bringing the total count down to 797, the lowest since March 2018, Baker Hughes said. That compares with 859 rigs operating during the same week a year ago.

Nickel spiked to its highest level in over two weeks on Friday as bearish investors covered positions.

Benchmark nickel on the London Metal Exchange surged nearly $US500 in about 10 minutes in the morning, spurred by Chinese investors covering short positions, traders said, continuing the rally in the afternoon.

That sent nickel surging 5 per cent to a peak of $US12,495 a tonne, the highest since April 30, before paring gains in closing open outcry activity to a bid of $US12,370, a rise of 4 per cent.

The move higher in nickel gained steam as it broke through its 200-day moving average, a key technical level, traders said.

Three-month LME copper climbed 0.5 per cent to finish at $US5955 a tonne in closing rings, but on a weekly basis it marked a sixth consecutive decline.

Fitch on Friday revised down its London three-month nickel average price forecast for 2019 to $US13,250 a tonne, from $US14,500 estimated earlier, on rising global economic risks, an escalating trade dispute and disappointing refined nickel demand from China so far this year.

Strong aluminium output is expected for the rest of the year due to falling costs, Commerzbank said in a note. "We believe that the continuing high supply, coupled with the decline in demand dynamism, argues against any sustained and significant recovery of the aluminium price."

Australian sharemarket

Australian shares closed the week higher despite falling away from its post-federal election 11-year high as trade war concerns weighed on the market in the back end of the week.

The S&P/ASX 200 Index rose 90.7 points, or 1.4 per cent, to 6456 this week while the broader All Ordinaries added 85.4 points, or 1.3 per cent, to close at 6545.6.

Westpac closed the week 10.7 per cent higher at $28.12, Commonwealth Bank added 7.3 per cent to end at $78.18, ANZ rose 7.7 per cent to $27.84 and NAB advanced 7.9 per cent to $25.81

Private health providers were also buoyed by the election result. Medibank Private climbed 12.2 per cent to $3.23, NIB Holdings ended the week at $6.72 after rising 14.1 per cent and Ramsay Health Care advanced 8.3 per cent to $70.25.